How are REIT and InvIT distributions taxed in India? REITs and InvITs are business trusts with pass-through status under Section 115UA. Their distributions are split into interest and rental income (taxed at slab rate), dividend (taxed or exempt depending on the SPV's tax regime) and return of capital. Capital gains on sale of listed units are 20% STCG under Section 111A or 12.5% LTCG under Section 112A above Rs 1.25 lakh for AY 2026-27.
Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) have become serious investment vehicles in India. Embassy Office Parks, Mindspace Business Parks, Brookfield India, and Nexus Select Trust on the REIT side, along with IndiGrid, IRB InvIT, and PowerGrid InvIT on the infrastructure side, collectively manage tens of thousands of crores in assets and distribute regular income to lakhs of unitholders.
The taxation is more complex than stocks or mutual funds because every distribution carries multiple components, each taxed under a different rule. Most investors lump the entire distribution as "dividend" and compute tax incorrectly. This guide breaks down each component, the applicable TDS, capital gains on unit sale, and how to report REIT/InvIT income correctly in your ITR for AY 2026-27.
What Are Business Trusts Under the Income Tax Act
REITs and InvITs are classified as "business trusts" under Section 2(13A) of the Income Tax Act, 1961 (Section 2(21) of the Income Tax Act, 2025). A business trust is a trust registered with SEBI as a REIT under the SEBI (Real Estate Investment Trusts) Regulations, 2014, or as an InvIT under the SEBI (Infrastructure Investment Trusts) Regulations, 2014.
The defining tax feature of a business trust is pass-through status under Section 115UA. The trust itself does not pay income tax on most categories of income. Instead, income passes through to the unitholders and is taxed in their hands. This avoids the double taxation that would occur if a company earned rental income (taxed at corporate rate) and then distributed it as dividend (taxed again in the shareholder's hands).
The Structure
A typical REIT or InvIT holds assets through Special Purpose Vehicles (SPVs), which are usually private limited companies. The trust owns majority equity in the SPVs. The SPVs earn income (rent from tenants, toll revenue, power transmission charges) and distribute it to the trust, which in turn distributes it to unitholders.
The tax treatment depends on which "pipe" the money flows through: interest paid by SPV to trust, dividend paid by SPV to trust, or rental income earned directly by the trust.
How Each Distribution Component Is Taxed
Every REIT/InvIT distribution statement breaks the payout into components. The tax treatment for resident individual unitholders for AY 2026-27 is:
| Component | Tax in unitholder's hands | TDS under Section 194LBA (resident) |
|---|---|---|
| Interest from SPV | Taxable at slab rate (other sources) | 10% |
| Dividend from SPV that opted for Section 115BAA | Taxable at slab rate | 10% |
| Dividend from SPV not under Section 115BAA | Exempt | Nil |
| Rental income from assets held directly by a REIT | Taxable at slab rate | 10% |
| Repayment of debt / other return of capital | Taxable under Section 56(2)(xii) only above the unit's issue price; otherwise reduces cost | Nil |
Interest Income
When the SPV borrows from the trust (a common structuring technique), the interest the SPV pays is passed through to unitholders. This interest is taxable in your hands at your applicable slab rate, reported under "Income from other sources" in Schedule OS of the ITR.
For most listed REITs, interest is the largest component of the distribution, often 50-70% of the total payout. This is because the trust-SPV loan structure is tax-efficient: the SPV deducts the interest as a business expense, reducing its corporate tax, while the trust passes it through without paying tax at the trust level.
Dividend Income
Dividend from the SPV to the trust has a two-fork treatment:
Fork 1: SPV opted for Section 115BAA (concessional corporate tax at 22%). If the SPV has opted for the concessional 22% corporate tax rate under Section 115BAA, the dividend it pays is not eligible for the pass-through exemption. The unitholder must pay tax on this dividend at slab rates.
Fork 2: SPV did NOT opt for Section 115BAA. If the SPV pays tax at the regular corporate rate (25% or 30% depending on turnover), the dividend enjoys pass-through treatment and is exempt in the unitholder's hands.
In practice, most large REIT/InvIT SPVs have opted for Section 115BAA because the lower tax rate benefits the overall structure. This means most dividend components in your distribution statement will be taxable. Check each SPV's status in the REIT's distribution statement or annual report.
Rental Income
Rental income earned directly by a REIT from real estate it owns (not through an SPV) is exempt at the trust level under Section 10(23FCA), but when distributed it is deemed to be the unitholder's income under Section 115UA(3). It is taxable in your hands at your slab rate as income from other sources, and the REIT deducts TDS at 10% on it under Section 194LBA. Claim that TDS credit in your return.
Repayment of Debt (Return of Capital)
When the SPV repays loan principal to the trust and the trust distributes it, the Finance Act 2023 rules (from AY 2024-25) apply:
- Under Section 56(2)(xii), such distributions become taxable as income from other sources once the cumulative amount distributed on a unit exceeds the price at which the business trust issued that unit (less amounts already taxed under this clause).
- The part that is not taxed reduces the cost of acquisition of your units (Explanation to Section 48), so it is taxed as a higher capital gain when you sell.
Example:
- You bought 100 units at Rs 300 each (also the issue price). Cost of acquisition: Rs 30,000.
- Over three years, you received Rs 5,000 in return-of-capital distributions. This is below the Rs 30,000 issue price, so nothing is taxable under Section 56(2)(xii).
- Adjusted cost of acquisition: Rs 30,000 − Rs 5,000 = Rs 25,000.
- If you sell at Rs 350 per unit (Rs 35,000), your capital gain is Rs 35,000 − Rs 25,000 = Rs 10,000, not Rs 35,000 − Rs 30,000 = Rs 5,000.
TDS on Distributions: Section 194LBA
Section 194LBA requires the business trust to deduct TDS on distributions to unitholders. The rates and rules:
For Resident Unitholders
- Interest component: TDS at 10%
- Dividend component (taxable): TDS at 10%
- Rental income component: TDS at 10%
- Return of capital component: No TDS
- Threshold: No minimum threshold. TDS applies on every rupee distributed, unlike regular company dividends where TDS applies only above Rs 10,000 a year (Rs 5,000 before 1 April 2025).
For Non-Resident Unitholders
- Interest component: TDS at 5% (subject to lower DTAA rate with proper documentation: Form 10F and Tax Residency Certificate)
- Dividend component: TDS at 10% (or DTAA rate, whichever is lower)
- Rental income component: TDS at applicable rates
Claiming TDS Credit
The TDS deducted on distributions appears in your Form 26AS and Annual Information Statement (AIS). When filing your ITR, claim credit for this TDS under the "TDS" schedule. If TDS exceeds your final tax liability, the excess is refunded. For a guide on reconciling TDS credit, see our Form 26AS and AIS guide.
Capital Gains on Sale of REIT/InvIT Units
When you sell your REIT or InvIT units on the stock exchange, the gain is taxed as capital gains. The holding period threshold is 12 months for listed units (same as listed equity shares).
For AY 2026-27 (FY 2025-26)
| Type | Holding period | Section | Rate |
|---|---|---|---|
| Short-term (STT paid on sale) | 12 months or less | 111A | 20% |
| Long-term (STT paid on sale) | More than 12 months | 112A | 12.5% on gains above Rs 1.25 lakh a year |
Section 112A expressly covers "a unit of a business trust", so the Rs 1.25 lakh annual exemption applies to listed REIT and InvIT units, shared with your listed shares and equity mutual funds. (The Finance Act 2025 change to Section 115UA(2) concerns tax on capital gains earned by the trust itself, not gains made by unitholders on selling units.)
Adjusted Cost of Acquisition
When computing capital gains on sale, remember to reduce your purchase price by any return-of-capital distributions received during the holding period. Use the adjusted cost, not the original purchase price.
If you inherited or received REIT units as a gift, the cost of acquisition is the previous owner's cost, and the previous owner's holding period is included. No indexation is available under Section 112A.
Securities Transaction Tax (STT)
STT is payable on the sale of listed REIT/InvIT units on a recognised stock exchange, and paying it is a condition for Sections 111A and 112A. STT paid is not deductible as an expense when computing capital gains.
How to Report REIT/InvIT Income in Your ITR
Step 1: Choose the Correct ITR Form
Distribution income (interest, taxable dividend, rental) is reported in Schedule OS, which ITR 1 (Sahaj) has. If you sold units, file ITR 2 unless your only capital gain is long-term under Section 112A up to Rs 1.25 lakh, which ITR-1 accepts for AY 2026-27. Use ITR 3 if you have business income. For selecting the right form, see our ITR form selection guide.
Step 2: Report Distribution Income
Interest and taxable dividend: Report in Schedule OS (Income from Other Sources). Enter the gross amount (before TDS) and the nature of income.
Rental component: Report in Schedule OS; it is taxable.
Exempt dividend (from SPVs not under Section 115BAA): Report in the exempt income schedule.
Return of capital: Not income until cumulative receipts exceed the unit's issue price (then report the excess under Section 56(2)(xii) in Schedule OS). Track the untaxed amount, because it reduces your cost of acquisition.
Step 3: Report Capital Gains from Sale
If you sold REIT/InvIT units during FY 2025-26:
- Short-term gains: Report in Schedule CG under Section 111A. Enter the sale value, purchase cost, holding period, and computed gain. Tax at 20%.
- Long-term gains: Report in Schedule CG under Section 112A. Enter the sale value, adjusted purchase cost (reduced by untaxed return-of-capital distributions), and computed gain. Tax at 12.5% on the aggregate 112A gain above Rs 1.25 lakh.
Step 4: Claim TDS Credit
Match TDS deducted on distributions with entries in Form 26AS and AIS. Enter the TDS details in Schedule TDS of the ITR. Any TDS in excess of your final tax will result in a refund.
REIT vs InvIT: Tax Differences
While both are business trusts under Section 115UA, there are practical differences in how their distributions are structured: REIT payouts often include rental income from directly held property and dividends from SPVs, while InvIT payouts are usually dominated by interest and repayment of debt from the project SPVs.
For tax purposes, the Section 115UA framework applies identically to both. The difference is in the composition of the distribution, which affects your effective tax rate. A distribution that is mostly exempt dividend is taxed far more lightly than one that is mostly interest and rental income, both of which are taxed at slab rates.
Common Mistakes When Filing REIT/InvIT Income
Treating the entire distribution as dividend. The most common error. Investors report the full distribution amount under "dividend income" and either pay tax on the whole thing or claim it as exempt. Both are wrong. Break the distribution into its components using the REIT's distribution statement.
Using ITR 1 with ineligible capital gains. ITR 1 accepts only Section 112A long-term gains up to Rs 1.25 lakh. Any short-term gain or larger long-term gain needs ITR 2; using the wrong form can lead to a defective return notice under Section 139(9).
Not adjusting cost for return-of-capital distributions. Return of capital reduces your cost of acquisition. If you sell units without adjusting cost, you understate your capital gains and will face scrutiny when the AIS data (which includes all distributions) does not match your ITR.
Treating the rental component as exempt. Rental income distributed by a REIT is taxable in your hands under Section 115UA(3). Report it and claim the 10% TDS credit.
Forgetting that the Rs 1.25 lakh LTCG exemption is shared. Section 112A gains on REIT/InvIT units, listed shares and equity funds share one Rs 1.25 lakh exemption per year.
Comparison with Other Investment Vehicles
REITs offer a middle ground: real estate exposure with stock-market liquidity and professional management. Capital gains on listed units get the same Section 111A and 112A treatment as listed shares, but most of the regular distribution (interest and rental) is taxed at slab rates, unlike exempt dividends from non-115BAA SPVs.
Listed REITs and InvITs in India (July 2026)
For reference, the currently listed REITs and InvITs on Indian stock exchanges:
REITs:
- Embassy Office Parks REIT (Embassy REIT)
- Mindspace Business Parks REIT
- Brookfield India Real Estate Trust
- Nexus Select Trust (retail-focused REIT)
InvITs:
- India Grid Trust (IndiGrid): power transmission
- IRB InvIT Fund: highway toll
- PowerGrid Infrastructure Investment Trust: power transmission
- National Highways Infra Trust (NHIT): highway toll
- Virescent Renewable Energy Trust: solar energy
Each has a different distribution composition. Check the quarterly distribution statement from each trust before filing your ITR.
This guide is based on Section 115UA and Section 194LBA of the Income Tax Act, 1961, the corresponding provisions of the Income Tax Act, 2025, the Finance Act 2025 amendment to Section 115UA(2), and SEBI regulations for REITs and InvITs. Capital gains rates reflect the amendments introduced by the Finance (No. 2) Act, 2024 (July 2024 budget). Section 112A (including the Rs 1.25 lakh exemption) applies to units of business trusts; Section 56(2)(xii) and the Explanation to Section 48 (Finance Act 2023) govern return-of-capital distributions. For individual tax computation on REIT/InvIT income, consult a qualified tax professional or explore Tax Garden's ITR filing services.
